Always the money

If you’re an American looking to do your part to protect tropical rainforests, you need look no further than your kitchen pantry. As you’ve likely heard by now from Friends of the Earth and others, the world’s leading killer of tropical forests is palm oil — and palm oil derivatives are in your cookies, your ice cream, your shampoo, and — I’m sorry to tell you this — in your chocolate.

While industry analysts attribute the ubiquity of palm oil to consumer demand, palm oil isn’t in all these products because you demanded it, because it’s healthy, or because it tastes good (it doesn’t). It’s there because it’s cheap. Palm oil is cheap because it’s produced by a global industry built on land grabbing, human rights abuses and environmental devastation. Along with low production costs and a growing market comes the other reason why palm oil has become ubiquitous: it gives high returns on investment.

Palm oil’s environmental footprint

Palm oil is a vegetable oil derived from the fruit of the oil palm tree, native to West Africa, and used, as of very recently, in thousands of consumer products, from baked goods and ice cream to cleaning products and biofuels. Because of its high melting point, its high yield, and its lack of unhealthy trans fats, palm oil has rapidly come to dominate the global vegetable oil market, with production projected to double again in the next decade. (About 76 percent of palm oil is used for foods, with the remainder used for industrial purposes including biodiesel.)

Nearly 90 percent of global palm oil production comes from Indonesia and Malaysia, where industry boosters argue it’s been a huge boon for the economy. World Wide Fund for Nature, the environmental juggernaut that initiated the industry-friendly Roundtable on Sustainable Palm Oil to certify palm oil according to environmental and social criteria, argues that palm oil has lifted millions of poor Indonesians out of poverty. But at what price?

Because palm trees do extremely well in the same conditions as rain forest, the industry’s expansion has relied on cutting and burning vast acreages of forest, draining fragile peat soils, and replacing native vegetation with palm oil monocultures. Less than half of Indonesia’s forests remain standing today, and by 2020 the Indonesian government plans to convert 45 million more acres of rain forests — an area the size of Syria — into palm oil plantations.

Indonesia’s rainforests are among the earth’s most biologically and culturally rich ecosystems, harboring the only wild populations of orangutans, Sumatran tigers and Sumatran rhinoceros. Our partners at Rainforest Action Network have launched a campaign to bring attention to these critically endangered animals, especially the orangutan, of which only 60,000 wild animals remain. The organization is targeting 20 snack food companies that use conflict palm oil in their products and urging consumers to participate in their In Your Palm campaign.

The African rain forest belt is suffering from the palm oil boom as well, with millions of acres of forest being converted to plantations from Liberia and Cameroon in West Africa across the heart of the continent to Uganda and Madagascar in the east.

It’s not just animals that are endangered: the palm oil monitoring group SawitWatch has identified 663 ongoing land disputes between palm oil companies and rural communities in Indonesia, many involving private armies and paramilitaries. In Nigeria, activists have been forced into hiding for opposing palm oil expansion, and in Liberia, plantation conditions are likened to modern-day slavery. Forced and child labor are part of business-as-usual.

Last month, Friends of the Earth released a report about a lesser-known company called Bumitama Agri that sells the majority of its palm oil to Wilmar International, a Singapore-based company that controls nearly half of the global palm oil trade. The report shows how Bumitama has destroyed at least 15,000 acres of rainforest in the past decade, including endangered orangutan habitat. At least 17,000 acres of its plantation land lacks valid permits, much of it inside protected forest reserves.

Bumitama deliberately acquired much of this land shortly before its initial public offering in April 2012; in its prospectus to investors, the company made it clear that its money-making strategy was to exploit these assets. Prospective investors were informed that Bumitama’s expansion plans included preferential rights to harvest from lands without the required licenses, and that the Hariyanto family — the majority owner of Bumitama Agri — would bear the liability risk.

A year later, in April 2013, several dying orangutans were rescued from one of Bumitama’s concessions. After a complaint was made to the RSPO, Bumitama pledged to stop clearing land until ecological assessments had been carried out. But satellite imagery revealed that Bumitama continued to clear forests and peat swamps for several more months in the area where the orangutans were found. When the allegations hit home, shortly after an RSPO meeting this October, the director of Bumitama, Gunardi Hariyanto Lin, resigned.

A very lucrative commodity

While it’s both illegal and unethical, Bumitama’s forest destruction is fully justified by economic logic. Everywhere, there are strong and growing incentives to grow more palm oil: the US Food and Drug Administration’s 2006 mandate that all food labels list trans fat content led to a spike in US palm oil consumption. The FDA is now considering a total ban on trans fats, which will likely give US palm oil imports a further boost. Likewise, palm oil consumption for biofuels in the EU has increased by 365 percent since 2006; Indonesia too is increasing its reliance on palm oil as a biofuel feedstock, with other countries sure to follow.

But a clear-eyed assessment of how the industry has achieved its rapid growth shows that consumer choice and government mandates are not the only drivers. It is true that palm oil enjoys natural advantages over its competitors, such as producing more oil on less land; and that it is low in trans fats (though high in saturated fats, which are of equal concern). But it cannot be denied that a key factor in cheap production — and thereby, in its rapid growth and high returns — is sector-wide disregard for environmental and human rights standards and animal welfare, and easy access to financing with few environmental and social strings attached.

According to the Malaysia Estate Owners Association, development of new palm plantations in Malaysia can bring up to 22.5 percent return on investment, while investing in established plantations can give nearly 10 percent. Such returns might explain why some of the top banks and institutional investors in the US and Europe —Citigroup, JPMorgan Chase, Barclay’s and Fidelity Investments, as well as several major pension funds — have palm oil in their portfolios.

Ironically, without the financial markets, palm oil wouldn’t be so solvent: every 10,000 acres of new palm oil plantations requires roughly $100 million in capital investments. Since 2008, major financial institutions have extended more than $20 billion in financing to the industry, including more than $14 billion in loans, and smaller amounts through bonds and equity.

A recent report by HSBC Global Research confirms the role of banks in driving the palm oil boom: in 2002 the Southeast Asian palm oil sector sought $3 billion in external financing; in 2012, it sought $55 billion. And there is no question that the money is flowing: Indonesia’s largest bank disbursed more than $4.4 billion USD to large palm oil growers this year, and plans to lend more next year. According to the Jakarta Globe, the Indonesian Palm Oil Producers Association has called for investment of 300 trillion rupiah by 2020 to “replace” 7.5 million acres of forest with new palm oil plantations.

To be clear, that’s seven and half million acres of forest that might be spared the axe if it were not for bank financing.

Moving toward sustainability?

Many industry boosters and NGOs believe, against all reason, that such expanding demand can be met “sustainably.” The HSBC report predicts that, due to growing awareness and civil society pressure, banks will begin to demand stronger sustainability standards. But the report notes that, for the moment, the supply of RSPO-certified palm oil exceeds demand by about 50 percent — and RSPO criteria themselves are increasingly considered too weak, even by WWF itself.

The HSBC report’s view that sustainability is becoming more important to investors in evaluating risk is reflected in growing concern among responsible financiers about the sector’s abuses. Early in 2013, the Government Pension Fund of Norway divested from 23 palm oil companies, including Wilmar, and last month a group of institutional investors from the U.S. and Europe, representing approximately $270 billion in assets, called for the development of transparent, traceable, deforestation-free palm oil supply chains.

On December 5, bowing to pressure from Friends of the Earth and many other civil society groups, Wilmar International, the company that dominates the palm oil market, announced a new policy to ban deforestation and exploitation from its operations and its supply chain. The announcement comes with a timeline to turn the company around by the end of 2015. Given the scale of Wilmar’s operations, it could signal a sea change in the palm oil industry.

But a policy on paper — essentially a voluntary commitment by a corporation with an extremely checkered history — is no substitute for strong national legislation, international norms to govern financing, and the empowerment of local communities and community-based organizations to determine the best use of their lands.

At worst, and in the absence of deeper changes, Wilmar’s new policy could serve as a smokescreen to allow the company’s rapacious practices to continue, and much like the RSPO, to provide a green sheen to an industry built on exploitation. At best, though, it could send a signal to governments and financial regulators that unless they put the reins on the financial actors, banks and investors that are driving the industry’s unchecked expansion, palm oil companies will continue to be financially motivated to reduce the world’s last rainforests to a sea of stumps.